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REGULATORY ENVIRONMENT

9 Months Ended

Sep. 30, 2019

Wisconsin Electric Power Company, Wisconsin Gas LLC, and Wisconsin Public Service Corporation

2020 and 2021 Rates

March 2019 Rate Application

In March 2019, WE, WG, and WPS filed applications with the PSCW to increase their retail electric, natural gas, and steam rates, as applicable, effective January 1, 2020. The applications reflected the following proposals:



	WE					WG					WPS
2020 Effective rate increase
Electric ^{(1) (2)}	$	83	million	/	2.9%	N/A					$	49	million	/	4.9%
Gas ⁽³⁾	$	15	million	/	3.9%	$	11	million	/	1.8%	$	7	million	/	2.4%
Steam	$	1	million	/	4.5%	N/A					N/A

2021 Effective rate increase
Electric⁽¹⁾	$	83	million	/	2.9%	N/A					$	49	million	/	4.9%
Gas	N/A					N/A					$	7	million	/	2.4%

ROE	10.35%					10.30%					10.35%

Common equity component average on a financial basis	52.0%					52.0%					52.0%


⁽¹⁾	WE and WPS amounts are net of approximately $94 million and $16 million, respectively, of previously deferred unprotected tax benefits from the Tax Legislation in 2020, and $17 million and $24 million, respectively, in 2021.


⁽²⁾	WPS amount is net of approximately $21 million that would be refunded to customers related to its 2018 earnings sharing mechanism.


⁽³⁾	WPS amount is net of approximately $7 million of previously deferred unprotected tax benefits from the Tax Legislation.

All three Wisconsin utilities also proposed to continue having an earnings sharing mechanism through 2021. The earnings sharing mechanism proposed was modified from its current structure to one that is consistent with other Wisconsin investor-owned utilities. Under the proposed earnings sharing mechanism, if the utility earns above its authorized ROE: (i) the utility retains 100.0% of earnings for the first 25 basis points above the authorized ROE; (ii) 50.0% of the next 50 basis points is refunded to customers; and (iii) 100.0% of any remaining excess earnings is refunded to customers.

The proposed increase in electric rates at WE was driven by higher transmission charges, recovery of SSR revenues that were assumed in WE's 2015 rate order but were not received, and an increase in costs associated with a purchased power agreement previously approved by the PSCW. WE also requested approval to continue collecting the carrying value of the Pleasant Prairie power plant and the PIPP using the current approved composite depreciation rates, in addition to a return on the remaining carrying value of the plants.

The proposed increase in electric rates at WPS was driven by the inclusion of WPS's SMRP, the Forward Wind Energy Center, and WPS's investments in two solar projects in rates, along with continued investments in system reliability and the recovery of various regulatory deferrals, including the deferral of the revenue requirement for ReACT™ costs above a previously authorized level. WPS also requested approval to continue collecting the carrying value of Pulliam units 7 and 8 and the Edgewater 4 generating unit using the current approved composite depreciation rates, in addition to a return on the remaining carrying value of the units.

The proposed increases at our Wisconsin natural gas utilities were driven by continued investment in our natural gas distribution systems.

August 2019 Settlement Agreements

On August 30, 2019, WE, WG, and WPS filed an application with the PSCW for approval of settlement agreements entered into with certain intervenors to resolve several outstanding issues in each utility's respective rate case. The settlement agreements reflect the following:



	WE					WG					WPS
2020 Effective rate increase (decrease)
Electric ^{(1) (2)}	$	37	million	/	1.3%	N/A					$	35	million	/	3.5%
Gas ⁽³⁾	$	10	million	/	2.8%	$	(1	) million	/	(0.2)%	$	4	million	/	1.4%
Steam	$	2	million	/	10.0%	N/A					N/A

ROE	10.0%					10.2%					10.0%

Common equity component average on a financial basis	52.5%					52.5%					52.5%

⁽¹⁾

These amounts are net of previously deferred unprotected tax benefits from the Tax Legislation. The WE and WPS settlement agreements reflect the majority of the unprotected deferred tax benefits from the Tax Legislation being amortized over 2 years. For WE, approximately $65 million of tax benefits would be amortized in each of 2020 and 2021. For WPS, approximately $11 million of tax benefits would be amortized in 2020 and $39 million would be amortized in 2021. The unprotected deferred tax benefits related to the unrecovered balances of the recently retired plants and the SSR regulatory asset would be used to reduce the related regulatory asset. The initial applications filed in March 2019 proposed that these tax benefits be refunded to customers over a period of 40 years with a significant portion being refunded in the first 2 years.


⁽²⁾	The WPS settlement agreement is net of $21 million of refunds related to its 2018 earnings sharing mechanism. WPS's settlement agreement reflects these refunds being returned to customers evenly over 2 years, with half being returned in 2020 and the remainder in 2021.

⁽³⁾

The WE amount includes previously deferred unprotected tax expense from the Tax Legislation, and the WPS and WG amounts are net of previously deferred unprotected tax benefits from the Tax Legislation. The settlement agreements for all three gas utilities reflect all of the unprotected deferred tax expense and benefits from the Tax Legislation being amortized evenly over 4 years. For WE, approximately $5 million of previously deferred tax expense would be amortized each year. For WG and WPS, approximately $3 million and $5 million, respectively, of previously deferred tax benefits would be amortized each year. The initial applications filed in March 2019 proposed that these tax impacts be refunded to or collected from customers over a period of 40 years, with a significant portion of the WPS benefit being refunded in the first 2 years.

The change in the rate increases between the initial applications filed in March 2019 and the settlement agreements was driven by various adjustments, including:


•	decreasing each utility’s proposed ROE (see table above);


•	increasing the common equity component in each utility’s capital structure (see table above);


•	extending amortizations as recommended in the PSCW Staff’s audit;


•	extending the period of recovery for the SSR escrow balance beyond what the PSCW Staff’s audit recommended; and


•	securitizing $100 million of Pleasant Prairie power plant’s book value.

Under the terms of the settlement agreement, WE would seek a financing order from the PSCW to securitize $100 million of Pleasant Prairie power plant's book value as of January 1, 2020, plus the carrying costs accrued on the $100 million during the securitization process and related fees. The securitization would reduce the carrying costs for the $100 million, benefiting customers.

The settlement agreements include the same earnings sharing mechanism for each utility that was proposed in the initial application filed in March 2019. The settlement agreements also require WE, WG, and WPS to maintain residential and small commercial electric and natural gas customer fixed charges at currently authorized rates through 2021 and to support maintaining WE's and WPS's electric market-based rates for large industrial customers in their current form.

At its meeting on October 31, 2019, the PSCW approved the settlement agreements without any known material modifications. The terms of these approvals are subject to our receipt and review of final written orders from the PSCW, which we expect to receive by

the end of 2019. The PSCW is scheduled to address outstanding issues from the initial applications that were not included in the settlement agreements in a subsequent meeting. We expect the new rates to be effective January 1, 2020.

2018 and 2019 Rates

During April 2017, WE, WG, and WPS filed an application with the PSCW for approval of a settlement agreement they made with several of their commercial and industrial customers regarding 2018 and 2019 base rates. In September 2017, the PSCW issued an order that approved the settlement agreement, which freezes base rates through 2019 for electric, natural gas, and steam customers of WE, WG, and WPS. Based on the PSCW order, the authorized ROE for WE, WG, and WPS remains at 10.2%, 10.3%, and 10.0%, respectively, and the current capital cost structure for all of our Wisconsin utilities will remain unchanged through 2019.

In addition to freezing base rates, the settlement agreement extends and expands the electric real-time market pricing program options for large commercial and industrial customers and mitigates the continued growth of certain escrowed costs at WE during the base rate freeze period by accelerating the recognition of certain tax benefits. WE is flowing through the tax benefit of its repair-related deferred tax liabilities in 2018 and 2019, to maintain certain regulatory asset balances at their December 31, 2017 levels. While WE would typically follow the normalization accounting method and utilize the tax benefits of the deferred tax liabilities in rate-making as an offset to rate base, benefiting customers over time, the federal tax code does allow for passing these tax repair-related benefits to ratepayers much sooner using the flow through accounting method. The flow through treatment of the repair-related deferred tax liabilities offsets the negative income statement impact of holding the regulatory assets level, resulting in no change to net income.

The agreement also allows WPS to extend through 2019, the deferral for the revenue requirement of ReACT™ costs above the authorized $275.0 million level, and other deferrals related to WPS's electric real-time market pricing program and network transmission expenses. The total cost of the ReACT™ project, excluding $51 million of AFUDC, was $342 million.

Pursuant to the settlement agreement, WPS also agreed to adopt, beginning in 2018, the earnings sharing mechanism that had been in place for WE and WG since January 2016, and all three utilities agreed to keep the mechanism in place through 2019. Under this earnings sharing mechanism, if WE, WG, or WPS earns above its authorized ROE, 50% of the first 50 basis points of additional utility earnings must be refunded to customers. All utility earnings above the first 50 basis points must also be refunded to customers.

Liquefied Natural Gas Facilities

On November 1, 2019, WE and WG filed a joint application with the PSCW requesting approval for each company to construct its own LNG facility. If approved, each facility would provide 1.0 billion cubic feet of natural gas supply to meet peak demand without requiring the construction of additional interstate pipeline capacity. These facilities are expected to reduce the likelihood of constraints on WE's and WG's natural gas system during the highest demand days of winter. The total cost of both projects is estimated to be approximately $370 million, with approximately half being invested by each utility. Commercial operation for the LNG facilities is targeted for the end of 2023.

Solar Generation Projects

On August 1, 2019, WE, along with an unaffiliated utility, filed an application with the PSCW for approval to acquire an ownership interest in a proposed solar project, Badger Hollow II, that will be located in Iowa County, Wisconsin. Subject to PSCW approval, WE will own 100 MW of the output of this project. WE's share of the cost of this project is estimated to be $130 million. Commercial operation for Badger Hollow II is targeted for the end of 2021.

In May 2018, WPS, along with an unaffiliated utility, filed an application with the PSCW for approval to acquire ownership interests in two solar projects in Wisconsin. Badger Hollow I will be located in Iowa County, Wisconsin, and Two Creeks will be located in Manitowoc County, Wisconsin. WPS will own 100 MW of the output of each project for a total of 200 MW. WPS's share of the cost of both projects is estimated to be $260 million. The PSCW approved the acquisition of these two projects in April 2019. Commercial operation for both projects is targeted for the end of 2020.

The Peoples Gas Light and Coke Company and North Shore Gas Company

Illinois Proceedings

In December 2015, the ICC ordered a series of stakeholder workshops to evaluate PGL's SMP. This ICC action did not impact PGL's ongoing work to modernize and maintain the safety of its natural gas distribution system, but it instead provided the ICC with an opportunity to analyze long-term elements of the program through the stakeholder workshops. The workshops were completed in March 2016. In July 2016, the ICC initiated a proceeding to review, among other things, the planning, reporting, and monitoring of the program, including the target end date for the program, and issued a final order in January 2018. The order did not have a significant impact on PGL's existing SMP design and execution. An appeal related to the final order was filed by the Illinois AG in April 2018. On June 28, 2019, the Illinois Appellate Court issued its ruling affirming the ICC’s final order. The appeal period has since expired for this ruling.

Qualifying Infrastructure Plant Rider

In July 2013, Illinois Public Act 98-0057, The Natural Gas Consumer, Safety & Reliability Act, became law. This law provides PGL with a cost recovery mechanism that allows collection, through a surcharge on customer bills, of prudently incurred costs to upgrade Illinois natural gas infrastructure. In September 2013, PGL filed with the ICC requesting the proposed rider, which was approved in January 2014.

PGL's QIP rider is subject to an annual reconciliation whereby costs are reviewed for accuracy and prudency. In March 2019, PGL filed its 2018 reconciliation with the ICC, which, along with the 2017 and 2016 reconciliations, are still pending. In July 2019, the ICC approved a settlement of the 2015 reconciliation, which includes a rate base reduction of $7.0 million and a $7.3 million refund to ratepayers. As of September 30, 2019, $7.1 million had been refunded to ratepayers.

As of September 30, 2019, there can be no assurance that all costs incurred under PGL's QIP rider during the open reconciliation years will be deemed recoverable by the ICC.

Minnesota Energy Resources Corporation

2018 Minnesota Rate Case

In October 2017, MERC initiated a rate proceeding with the MPUC. In December 2018, the MPUC issued a final written order for MERC. The order authorized a retail natural gas rate increase of $3.1 million (1.26%). The rates reflect a 9.7% ROE and a common equity component average of 50.9%. The final rates were implemented on July 1, 2019. The final approved rate increase was lower than the interim rates collected from customers during 2018 and through June 30, 2019. Therefore, MERC refunded $8.0 million to its customers during the third quarter of 2019.

The final order addressed the various impacts of the Tax Legislation, including the remeasurement of deferred tax balances. All of the impacts from the Tax Legislation have been included in base rates. The order also approved MERC's continued use of its decoupling mechanism for residential customers. Effective January 1, 2019, MERC's small commercial and industrial customers are no longer included in the decoupling mechanism.

Upper Michigan Energy Resources Corporation and Michigan Gas Utilities Corporation

Tax Cuts and Jobs Act of 2017

In February 2018, the MPSC issued an order requiring Michigan utilities to make three filings related to the Tax Legislation. The first of those filings, which was filed in March 2018, prospectively addressed the impact on base rates for the change in tax expense resulting from the federal tax rate reduction from 35% to 21%. UMERC and MGU proposed providing a volumetric bill credit, subject to reconciliation and true up. In May 2018, the MPSC issued orders approving settlements that resulted in volumetric bill credits for all of UMERC's and MGU's customers effective July 1, 2018. The bill credits will remain in effect until each company's next rate proceeding.

The second filing, which was filed in July 2018, addressed the impact on base rates for the change in tax expense resulting from the federal tax rate reduction from 35% to 21% from January 1, 2018 until July 1, 2018. UMERC and MGU proposed to return the tax

savings from these months to customers via volumetric bill credits over multiple months. The MPSC issued orders approving settlements in September 2018. In accordance with the settlement orders, the savings were returned to UMERC's and MGU's customers via volumetric bill credits that were in effect from October 1, 2018 through December 31, 2018.

The third filing was filed in October 2018 and addressed the remaining impacts of the Tax Legislation on base rates – most notably the re-measurement of deferred tax balances. UMERC and MGU proposed providing a volumetric bill credit, subject to reconciliation and true up, to return these remaining impacts of the Tax Legislation to customers. The MPSC issued orders approving settlements in May 2019. The settlement orders provide for volumetric bill credits to UMERC’s and MGU’s customers effective June 1, 2019. The bill credits will remain in effect until each company's next rate proceeding.